How 'SECURE 2.0' could boost your retirement plans

How ‘SECURE 2.0’ could boost your retirement plans

Photo: colin dewar (Shutterstock)

SECURE 2.0 was signed into law in late 2022. The second version of this law, standing for “Preparing Every Community for Retirement Improvement,” is designed to keep building improvements across the US. withdrawal system. If retirement is far off or fast is coming for you, here’s what you need to know about how SECURE 2.0 will affect your retirement planning.

Changes to Required Minimum Distributions

Required Minimum Distributions (RMDs) are the amount of money required by the IRS You must withdraw money from your retirement account each year. SECURE 2.0 reduces the impact of RMDs in several ways.

Firstly, the age to start taking RMDs has increased to 73 in 2023 and will rise again to 75 in 2033. This gives savers an extra year for tax deferral (the previous age was 70.5 in 2022). ).

Previously, if you didn’t take your RMD by the deadline, you were charged a 50% penalty. Under SECURE 2.0, the penalty for not taking an RMD was reduced to 25% of the RMD amount. If the error is corrected in a reasonable and timely manner, the penalty may be further reduced to 10%. Also, if you can show that you did not take an RMD as a result of an understandable error, you may be able to get a full waiver of the penalty. And starting in 2024, RMDs for Roth accounts will no longer be required in employer retirement plans. These relaxed rules are great news for the many savers who may miss installments due to a simple oversight.

Changes in the amount of catch-up contributions for older workers

Currently, if you are at least age 50, the catch-up contribution rules allow you to add more money to your retirement savings accounts than the standard contribution limit for the year. Come 2025, these catch-up contributions will increase for 401(k), 403(b), government plans, and IRA account holders. This gives anyone who has delayed retirement contributions (or hasn’t yet started saving) the ability to “catch up” before reaching retirement age.

For traditional and Roth IRAs, the catch-up contribution amount was previously set at $1,000. Beginning in 2024, the $1,000 amount will be adjusted annually for inflation (as the base amount already is).

For 401(k) and other employer-sponsored plans, the 2022 update contribution limit for workers age 50 and older was $6,500 and is $7,500 by 2023. Under SECURE 2.0, for the most part, the special maximum catch-up tax for workers age 60-63 is the greater of $10,000 or 150% of the “standard” catch-up tax amount for 2024. The $10,000 amount will be adjusted for inflation each year beginning in 2026.

Changes also for younger workers

Even if retirement is decades away, the provisions of SECURE 2.0 can affect how you maximize your long-term savings.

401(k) Automatic Enrollment

Beginning in 2025, employers that offer a 401(k) plan will be required to automatically enroll their employees in the plan, unless the employees opt out. The automatic enrollment fee will be between 3 and 10%.

Increased access to emergency savings

One of the highlights of SECURE 2.0 is the ability for employees to withdraw up to $1,000 from their retirement account for emergency spending without having to pay the typical 10% early withdrawal tax penalty if they are under age 59½ . Businesses could also allow workers to open an emergency savings account through automatic payroll deductions, capped at $2,500.

For a complete summary of all the provisions included in SECURE 2.0, you can read more information hbefore. While it’s clear that this law offers more flexibility and greater protections for savers, everyone’s retirement plan is different. Be sure to consult a financial advisor or tax professional to understand how the SECURE 2.0 changes apply to you personally.

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